On the other hand, the inclination to resort immediately to fiscal policy, even when the economy is faced with weak or moderate swings, is also connected with the influence of cyclical Keynesianism. This attitude, which plays down the promise of compensatory central bank policies to a wholly unwarranted extent, was based on an unreasonable version of cyclical Keynesianism. Fortunately, this attitude has recently been weakening. It is true that central bank policies cannot cope with significant tendencies toward instability all by themselves, but they can do much to counteract weak or moderate tendencies toward instability, and they have the great advantage of prompt adjustability. This is being increasingly recognized.
Let me now turn to what I have called "stagnationist Keynesianism." The basic premises of stagnationist Keynesianism include those of cyclical Keynesianism and also a further premise. It is postulated that when at the capacity level of output planned investment begins to fall short of saving by a significant margin, conventional easy money policies are insufficient to restore balance, and that the wage-price flexibility mechanism either cannot or should not be relied upon to restore it. This is implied in cyclical Keynesianism, too. In addition, stagnationist Keynesianism implies that in advanced industrial economies such underinvestment or oversaving tends to become the typical state of affairs. Thus, we are supposed to get a tendency toward chronic unemployment; that is, toward a level of underutilization where saving ceases to be greater than planned investment.
Stagnationist Keynesianism had a very great impact on the thinking of economists in the decade following the publication of the General Theory. The number of converts was especially great in the United States. Even now it is not uncommon to try to explain away the characteristics of all decades other than the thirties by the hypothesis that these other decades have had some exceptional property.
By now the stagnationist predictions have acquired a very substantial degree of implausibility. From the outset the proponents of the doctrine were faced with the difficulty that by the logic of their argument the evils of stagnation should have emerged gradually during a span that started a long time ago, about the turn of the century or even earlier. The logic of the argument, as I see it, is centered on the assumption that a gradually mounting pressure of diminishing returns reduces the rate of return to investors on the amount of new investment which would be required to match full employment savings. Innovations, it is then argued, should be
expected to become increasingly insufficient to offset this growing pressure of diminishing returns.
Yet the process of capitalist expansion into vacant or primitive areas started to slow very much earlier than in the thirties. The same is true of the proportionate rate of growth of the population. Surely, in the United States and also in the world of Western capitalism taken as a whole, the rate of increase in "utilized land" and in the labor supply (the increase in land-plus-labor, so to speak) was much smaller relative to the rate of increase in the capital stock about 1900 than several decades earlier. By the turn of the century, innovations were surely performing against a "mounting pressure of diminishing returns." They have been performing against a mounting pressure for a long time. In the long run they have been offsetting this mounting tendency quite successfully. We have been adjusting to a rising scarcity of land-plus-labor relative to capital.
Perhaps the best way of expressing this is to say that Keynes and the stagnationists were right in maintaining, or at least implying in their argument, that changes in the relative resource positions of advanced economies call for certain adjustments. To be more specific here than the stagnationist literature has been, one or more of the following adjustments is needed if profit rates are not to fall to very low levels: (1) more plentiful innovating activity (that is, innovating activity that raises output per unit of resource-inputs more than was the case in earlier phases) ; or (2) relatively more land-and-laborsaving and relatively less capitalsaving innovating activity (that is, innovating activity that has a more favorable effect on the relative share of capital than did the earlier innovations) ; or (3) a lower propensity to save (lower investment-output ratio), corresponding to the lower rate of acquisition of new resources which are complementary with capital.
Keynes and the stagnationists seem to have been wrong in implying that we shall not get some combination of these adjustments. Advanced economies seem to have been getting both the first and the third of these adjustments; that is, more plentiful innovating activity and a lowering of the investment-output ratio. There is a presumption, it seems to me, that in this connection the emphasis should be placed more on accelerated innovating activity than on the lowering of the investment-output ratio.